Does Trade Make People Better Off?

Often times when talking about free trade, protectionists argue that trade does not necessarily make people better off. They often point to those who lose their jobs to more efficient and less costly foreigners as a detrimental result of free trade. However, this view misunderstands what economists mean by “gains from trade.”

Suppose I am in the market for a new laptop computer. If I am permitted to trade freely with anyone in the world, I will choose the computer that best fits my preferences. Now suppose that I have narrowed my selection to either an HP or a Sony. Absent trade restrictions, I decide to purchase the Sony because I can get the same quality computer for a lower price. Thus I am better off and so is Sony. However, if someone at HP lost their job as a result of this purchase, protectionists would claim that society is not better off.

Now consider the alternative. Suppose that the government has prior knowledge of my intentions of purchasing the Sony laptop. Protectionists in the walls of Congress decide that they need to save the jobs of those working at HP and imposes a trade restriction on Japanese made computers. Since I still need a computer, I may purchase my second choice, the HP, or withhold my purchase until a later date. The man at HP who kept his job is better off. Unfortunately, neither I nor Sony can be considered better off.

All too often protectionists attempt to view trade with what can best be described as a social utility function. Equally important to their analysis is the fact that workers are given much more weight than consumers, which results in favoring higher prices and possibly lower efficiency. Unfortunately for protectionists, we cannot aggregate the preferences of society (see Arrow’s Impossibility Theorem).

When we discuss trade, we must only be concerned with those involved in the transaction. Thus, although it is a favorite phrase used by protectionists, there are no “winners” or “losers” involved in freely traded commodities because one will not trade with others if it will make him worse off (the “loser”). Therefore, if trade takes place it must be true that each participant is better off. We can make no such generalization about society, nor should we.

This argument is by no means an argument against buying domestic goods. It is perfectly acceptable for individuals to purchase goods within their own country or community if that increases their own utility. However, it is not acceptable for those same individuals to impose their preferences on others.